Software firms miss out on tax aid

First published in the New Zealand Herald on Thursday July 25, 2013

Proposed tax changes that aim to improve cashflow for start-ups include some fishhooks for software companies and firms that run clinical trials, a Deloitte partner says.

An Inland Revenue Department policy paper proposes allowing 100 per cent of eligible tax losses arising from research and development expenditure to be immediately deductible.

Minister of Science and Innovation Steven Joyce said that under the current regime, tax losses must be carried forward and deducted against future taxable income.

“Early-stage businesses often endure particularly long periods of tax loss meaning they cannot access the benefit of these loss deductions when they need it most,” Joyce said.

“The proposals to remove this distortion in the tax system are another part of the Government’s agenda of building a more productive and competitive economy that supports innovative Kiwi businesses, investment, jobs and growth.”

Deloitte tax partner Darren Johnson said the proposed changes were mostly positive. “They’re focusing on the right area – cashflow,” said Johnson.

But he said the fact that software coding was not considered research and development and was excluded from the proposed changes would have a detrimental impact on some firms.

“In the start-up and tech space, a huge portion of the companies are software companies developing software to take international,” Johnson said.

“A lot of money is actually spent on software coding so limiting that is quite a major.”

And he said firms in the biotechnology sector would be particularly disadvantaged by clinical trial expenses being excluded from the changes.

Listed companies, qualifying companies or special corporate entities will also be ineligible.

Johnson said there was no rationale for excluding listed firms, as early stage companies often took on stock exchange listings as a means of raising capital.

“Just because a company is listed doesn’t make it different to any other type of start-up.”

Joyce said ministers and officials would consider submissions on the proposal.

“It’s important to note that none of the proposals in the paper will make anyone worse off and the core proposal being consulted on will greatly improve the position for many start-ups with high research and development costs,” he said.

Eligible losses would be capped at $500,000 initially – equivalent to a refund of $140,000 – but would rise incrementally.

Submissions close on August 30.

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